world economic storm coming?

We take no pleasure in this essay. If the world economy struggles, it means that human misery has increased across the globe. There is already more than enough suffering in this world.

We, from time to time, read the business and financial articles and commentaries on various websites. What we are now reading is very troubling and has caused us to back burner another essay in the draft stage, and to turn our attention to the state of the world’s economy. (There are various market, commodity, and financial statistics that we look at every business day.)

There are some commentators who are forecasting another, and much more severe, financial (and thus economic) collapse over the next 2 to 3 years, (i.e. 2014 – 2015). This is not mere fear mongering or journalistic sensationalism. These analysts do make at least a persuasive case, if not a compelling one, for this terrible scenario. (Keep in mind that the less developed countries (in Asia, and Africa) suffered more in the 2008/9 economic collapse than the industrial nations. This was so because the rapid collapse in world market prices for their raw materials and agricultural products devastated their smaller, less diversified economies.)

So, let’s approach this topic in 2 segments. First, why is this likely to occur? Second, what can a person do to protect his or her family from this collapse should it occur. (If you choose to, you can skip the analysis and scroll down to segment 2 below.)

1. Likely to occur?

It seems so. For years, really decades, the industrial world has lived on borrowed capital. (The reasons for this are varied and diverse, and would take us off on a tangent.) Governments from Tokyo to Washington to all throughout Europe have printed their fiat currencies which are now losing value rapidly. The Japanese Yen is virtually in free fall against other major currencies. The Japanese have one of the largest debt to GDP ratios in the industrial world. The US dollar, that safest of safe havens, is on borrowed time (no pun). Consider that it is measured against the Euro, another sick and failing currency. Yet, the price of an ounce (an ounce, 28.4 grams!) of gold has soared in the past 10 or so years in both dollar terms and in Euro terms. Similarly, silver and other metals have increased dramatically in price. The once mighty US dollar is losing its value, and is not likely to recover it.

The central bankers around the world have printed truly outrageous sums of money since 2008 in an attempt to forestall a worse collapse in asset values and the world’s economy. This cannot continue indefinitely as there will be no buyers of this government debt that pays very low interest (a negative real interest rate when compared to inflation), and whose principal can never and will never be repaid (it just keeps being rolled over). The bond markets in the US are already beginning to show a much reduced appetite for US Treasury bonds.

Europe, Japan, and the US are all in recession, perhaps, permanently. These are the bitter fruits of failed economic policies pursued by reckless and irresponsible governments. Remember, governments are only as good as the people who make them up!! In Spain, the unemployment rate is at 25 per cent – that is depression level unemployment. The rate for young people, 18 – 24, is now over 50 per cent! Social unrest and upheaval are likely. Greece, as you know, has already had riots and destruction in the past few years.

In Europe, the German taxpayers are balking at bailing out the debt ridden nations in the south of the Eurozone. Germany is going to leave the European Union and issue Deutsch Marks and stop using the Euro. When that happens, the Euro and all the debt denominated in Euros will be worthless. Major Wall Street banks are large holders of European debt. The financial fallout of Germany going its own way will hit the US hard.

Lastly, and most importantly, the US shows absolutely no political will to get its fiscal house in order. None. Instead of cutting (read: reducing) the out of control government spending, both parties are posturing and blaming the other side. (Obama proposes spending levels that guarantee near trillion dollar yearly deficits for the next several years!) Tax increases will not solve the problem. Therefore, the debt ceiling will be raised again and again and again. The national debt will continue to climb each and every year. The financial markets will not accept this, and it will be difficult for Bernanke (or his successor) to keep on printing money to prop up this sham. (The so-called Federal Reserve has been buying some of the government’s debt (bonds) for some time. I always ask 2 questions. Where does all this “money” come from (in hundreds of billions)? And, where does all this money go?) To sell these government bonds to anyone, interest rates will have to rise, perhaps significantly.

Confidence is being eroded in the US government and in the US’ economic future. Look for markets to become jittery, and then to start to fall hard in the next several quarters. When loss of market confidence turns to panic, it will be like the fall of 2008 all over again. You will witness daily significant declines in asset values, especially in financial assets (stocks, mutual funds, bonds, financial derivatives). (By the way, as the stock market appears to be a zero sum game, short sellers will reap enormous profits as they devastate the stock holdings of pension funds in the US. Your pension with your employer is not as safe as you may think.) International markets from Rio de Janeiro to Sydney to Hong Kong to Bombay (Mumbai) will also be brought down as they were in 2008.

The most upsetting thing about this situation is that it did not need to happen. We are not talking about earthquakes, tropical cyclonic storms, etc. that man cannot control. This economic malaise is man made and did not have to happen. Sadly, when Europe and the US collapse, they will drag down the whole world. China can forget about exporting to these two large customers. They won’t be able to pay. Everyone of us, all 7 billion, will be adversely affected.

I personally hope that this scenario turns out to have been overly pessimistic. But, given that the western industrial world continues down the path that it is on, we have to prepare for the worst.

2. What can a person do?

On the macro level, there is nothing we can do. We are victims of a corrupt system that cannot be “reformed”. It is not the free market capitalist system that is to blame! It is the myopic, inept government intervention into the market economy that is the culprit. These governments are aided by the central bankers.

However, on the micro or individual level, we can do a few things to help protect ourselves from this approaching storm.

1. If you have debt (mortgage, car loan, etc.) try to get this into a fixed rate contract. Avoid variable rate loans like the plague. Rates will not likely remain low forever. When they start to rise, rates may keep on rising for some time, and then many people will be stampeding to get a fixed rate loan (meaning it will be more difficult to get one quickly).

2. Keep some of your savings in the form of cash. The stock market (and this includes mutual funds that are composed of common stocks) is now at near historic highs in the US even though the underlying economy is weak. It is much more likely that stocks are going to go down in price than continue to go ever higher. Now, may be the time to liquidate some of your stock positions, meaning take some money off the table.

3. Perhaps, being a little conservative in your financial decisions would be wise. What I mean is that with so much uncertainty, you may not want to carry a high debt load. Maybe you do not buy such an expensive car next year if you really cannot afford to do so. Or you scale back in some areas of large purchases. Remember: There is no guarantee that you or your spouse will have a job next year, or the year after.

The sad fact is that significant financial and economic uncertainty (and risk) are here to stay for many years to come. These governments that created these problems are not capable of solving them.